Prices, Spatial Competition, and Heterogenous Producers: An Empirical Test

32 Pages Posted: 25 May 2006 Last revised: 4 Jun 2022

See all articles by Chad Syverson

Chad Syverson

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: May 2006

Abstract

In markets where spatial competition is important, many models predict that average prices are lower in denser markets (i.e., those with more producers per unit area). Homogeneous-producer models attribute this effect solely to lower optimal markups. However, when producers instead differ in their production costs, a second mechanism also acts to lower equilibrium prices: competition-driven selection on costs. Consumers%u2019 greater substitution possibilities in denser markets make it more difficult for high-cost firms to profitably operate, truncating the equilibrium cost (and price) distributions from above. This selection process can be empirically distinguished from the homogenous-producer case because it implies that not only do average prices fall as density rises, but that upper-bound prices and price dispersion should also decline as well. I find empirical support for this process using a rich set of price data from U.S. readymixed concrete plants. Features of the industry offer an arguably exogenous source of producer density variation with which to identify these effects. I also show that the findings do not simply result from lower factor prices in dense markets, but rather because dense-market producers have low costs because they are more efficient.

Suggested Citation

Syverson, Chad, Prices, Spatial Competition, and Heterogenous Producers: An Empirical Test (May 2006). NBER Working Paper No. w12231, Available at SSRN: https://ssrn.com/abstract=902583

Chad Syverson (Contact Author)

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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